Having underperformed the broad US equity market in recent years, Morningstar Wide Moat Focus Index performance has improved markedly since mid-May. The index rose 12.2% from May 14 through Sept. 7 versus just 3.6% for its parent index, the Morningstar US Market Index, over the same period.
This performance resurgence has been driven by two key elements of its construction methodology:
- Valuation Focus. The index, due to its focus on undervalued companies with wide economic moats, has been underweight AI-related stocks since the “AI trade” started picking up steam in 2023. Concurrently, it has exhibited a sizable overweight to software stocks as the industry was negatively impacted by the rise of agentic AI. However, with the momentum of the AI trade having slowed to some degree, large positions in software companies that have rallied significantly, like Veeva Systems (VEEV), Fortinet Inc. (FTNT), Palo Alto Networks (PANW) and Datadog (DDOG), have provided a meaningful performance boost.
- Equal Weighting. The Morningstar Wide Moat Focus Index employs an equal-weighted approach, ensuring that it avoids concentration risk in periods where one overarching theme drives the lion’s share of market return. While this aspect of the index methodology has weighed on its performance amid the AI boom of recent years, it has proven beneficial in the last few months, as the largest holdings in the market cap-weighted Morningstar US Market Index have underperformed the broad market.
Morningstar Wide Moat Focus Index: Top 10 Securities by Active Return %
Time Period: May 14 – Sept. 7
Andrew Lane – Director of Equity Research, Index Strategies, Morningstar:
“Over its nearly 20-year live track record, the Morningstar Wide Moat Focus Index’s rules-based construction methodology has employed a consistent approach to finding great businesses at attractive valuations. At times, this methodology also makes it vulnerable to underperformance amid momentum-driven rallies like the AI boom. However, over a full market cycle, we maintain conviction that targeting undervalued companies with wide economic moats in an equal-weighted manner represents a highly valuable solution for investors.”
Brandon Rakszawski – VP, Director of Product Management, VanEck:
“Recent performance for the Morningstar Wide Moat Focus Index and VanEck Morningstar Wide Moat ETF underscores the value of bottom-up, fundamental research for long-term investors. In today's volatile market, where disruptive forces like artificial intelligence are rapidly reshaping the opportunity set, what matters is a long-term focus rooted in a proven process, not a reactionary, short-sighted approach.”
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